Dow Falls 1,000, Then Rebounds, Shaking Market

Published: May 7, 2010

A bad day in the stock market turned into one of the most terrifying moments in Wall Street history on Thursday with a brief 1,000-point plunge that recalled the panic of 2008.

It lasted just 16 minutes but left Wall Street experts and ordinary investors alike struggling to come to grips with what had happened -- and fearful of where the markets might go from here.

At least part of the sell-off appeared to be linked to trader error, perhaps an incorrect order routed through one of the nation's exchanges. Many of those trades may be reversed so investors do not lose money on questionable transactions.

But the speed and scale of the plunge -- the largest intraday decline on record -- seemed to feed fears that the financial troubles gripping Europe were at last reaching across the Atlantic. Amid the rout, new signs of stress emerged in the credit markets. European banks seemed to be growing wary of lending to each other, suggesting the debt crisis was entering a more dangerous phase.

Traders and Washington policy makers struggled to keep up as the Dow Jones industrial average fell 1,000 points shortly after 2:30 p.m. and then mostly rebounded in a matter of minutes. For a moment, the sell-off seemed to overwhelm computer and human systems alike, and some traders began referring grimly to the day as ''Black Thursday.''

But in the end, Thursday was not as black as it had seemed. After briefly sinking below 10,000, the Dow ended down 347.80, or 3.2 percent, at 10,520.32. The Standard & Poor's 500-stock index dropped 37.75 points, or 3.24 percent, to close at 1,128.15, and the Nasdaq was down 82.65 points, or 3.44 percent, at 2,319.64.

But up and down Wall Street, and across the nation, many investors were dumbstruck. Experts groped for explanations as blue-chip stocks like Procter & Gamble, Philip Morris and Accenture plunged. At one point, Accenture fell more than 90 percent to a penny. P.& G. plunged to $39.37 from more than $60 within minutes.

The crisis in Greece, high-speed computer program trading, the debate over regulatory reform in Washington, talk of errant trades -- all were pointed to as possible catalysts. But most agreed the plunge would not have been as bad had the markets not already been on edge over the debt crisis in Europe.

''There is a recognition that the Greek crisis has morphed into not only a European crisis but is going global,'' said Mohamed A. El-Erian, chief executive of Pimco, the money manager.

On the trading floor of the New York Stock Exchange, traders shouted or watched open-mouthed as the screens lighted up with plummeting prices and as phones rang off the hook. ''It was almost like 'The Twilight Zone.' '' said Theodore R. Aronson of Aronson, Johnson & Ortiz, a money management firm in Philadelphia.

Wall Street managers wandered their trading floors, trying to calm their people and figure out what was going on. They began to notice wild movements in stocks like P.& G. and Philip Morris. Many traders said computer program trades accelerated the slide as market indexes fell through crucial levels.

In Washington, Treasury officials began combing market tapes for answers. By the evening they still had not gotten to the bottom of it, but they discovered some aberrations -- market blips -- in trading coming out of Chicago.

The Treasury secretary, Timothy F. Geithner, was returning to the Treasury about 2 p.m. from the Capitol when he saw on his BlackBerry that the market was down 3 percent. He called the Treasury's market room, which constantly monitors financial exchanges; officials there theorized that the cause was Greece's and Europe's financial woes.

Minutes later in the Treasury hallway, Mr. Geithner looked again at his BlackBerry and saw that the market was down nearly 9 percent. He told colleagues it had to be a mistake.

Mr. Geithner immediately called the market room and then the Federal Reserve. He held a conference call with Fed officials and Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission. About 3:15, Mr. Geithner walked to the Oval Office to brief President Obama.

Next Mr. Geithner spoke with European central bankers. After the markets closed, at 4:15 and again at 5:45, he joined conference calls with the heads of the Fed, the New York Fed, the S.E.C. and the Commodity Futures Trading Commission; the calls were expected to continue into the evening.

The Group of 7 industrial nations' ministers and governors, including Mr. Geithner, plan a conference call at 7:30 a.m. Friday Eastern time.

As of about 6 p.m., all the officials knew was that there had been what one called ''a huge, anomalous, unexplained surge in selling, it looks like in Chicago, at about 2:45.'' The source remained unknown, but it had apparently set off algorithmic trading strategies, which in turn rippled across everything, pushing trading out of whack and feeding on itself -- until it started to reverse.

Federal officials fielded rumors that the culprit was a single stock, a single institution or execution system, a $16 billion trade that should have been $16 million. But they did not know the truth.

What happens to the day's market losers will depend on the nature of the cause and whether it can be identified. That is a question for the S.E.C. The Nasdaq market said in the evening that it would cancel all trades in hundreds of stocks whose prices had swung wildly between 2:40 p.m. and 3 p.m.

As Wall Street reeled, anchors on CNBC, Bloomberg and the Fox Business Network turned their attention to the Dow.

When the Dow was down more than 900 points and the CNBC anchor Erin Burnett observed that the P.& G. stock had dropped 25 percent, Jim Cramer, the former hedge fund trader and the host of ''Mad Money,'' seemed to calm the conversation a bit by basically saying, ''Buy, buy, buy.''

''If that stock is there, you just go and buy it,'' he said of P.& G. ''That is not a real price. Just go buy Procter & Gamble.''

The day's uncertainty pushed the euro to its lowest level against the dollar in 14 months. It slipped to $1.2529 at one point before closing at $1.2602. The dollar's rise, and the mounting fear of a slowdown in global growth, sent commodities prices lower. Crude oil fell $2.86 to settle at $77.16 a barrel.

By the close, when calm was restored, the focus was on working out what had happened.

The S.E.C. and the Commodity Futures Trading Commission said they were reviewing ''unusual trading activity.'' But already markets were turning attention back to Europe -- whether German lawmakers would approve the Greek bailout on Friday, whether warning signals would flash brighter, whether the euro zone would stay together, or whether this was a precursor of more gyrations to come.